Silicon Valley vs. Antitrust Regulators...Fight!

Judging by the political winds, Silicon Valley seems headed for a showdown with antitrust regulators.

For the first time since 1988, the Democratic Party’s platform includes stronger antitrust enforcement, while leading liberals have singled out Google, Apple and Facebook for holding too much market power.

Republicans considered (but ultimately rejected) inserting stronger antitrust language in their party platform, and standard-bearer Donald Trump has a famously frosty relationship with Silicon Valley, favoring heavier taxation and forcing Apple to shift manufacturing to the U.S.

Those expecting a showdown, however, may be disappointed. That’s because antitrust regulators and U.S. judges tend to believe that products that don’t cost a dime are beyond their purview. Moreover, that’s how most of Silicon Valley’s products are marketed these days. Facebook’s slogan reassures “It’s free and always will be.” Google claims: “One free account gets you into everything Google.” In addition, Apple has an entire section of its App Store devoted to “free apps.”

Drawing on my experiences as a former Department of Justice antitrust attorney, I’ve argued that U.S. antitrust laws are in fact broad enough to include these products – which are hardly “free.” Unfortunately, however, as my analysis of the history of enforcement in these markets shows, the trend in the U.S. has been away from antitrust oversight.

Everything is ‘free’

We live in an increasingly “free” world.

Ours is a world where vast libraries of information and content are available at the click of a button or tap of a screen – and all of it is (seemingly) free. Google search, Twitter, Instagram, Pokémon Go: all free.

If these products are freely available, what room is there for antitrust, a body of law often understood as focused on protecting consumers from artificially high monopoly prices?

Prominent judge (and antitrust legend) Robert Bork, for example, contended that search engines cannot be liable under antitrust laws because they are “free to consumers.”

U.S. antitrust enforcers appear, for the most part, to agree with Bork. Since the early days of the internet, “free” digital products have largely escaped scrutiny.

Giving ‘free’ a free pass

The first antitrust case targeting free digital products was also the most famous. At the outset of the 1990s Microsoft trial, the Department of Justice initially pursued a predatory pricing theory: Microsoft, it alleged, “set a zero price for its browser for the purpose of depriving Netscape of revenue and protecting [Microsoft’s] operating system monopoly.”

In other words, the DOJ at first argued that offering a product free doesn’t excuse a company from antitrust liability. However, the government subsequently dropped this theory on appeal. It is unclear why it did so, though a 1993 Supreme Court ruling had made any predatory pricing lawsuit virtually impossible to win. Perhaps the added difficulty of convincing an appellate judge that “free” was illegal simply caused the government to focus on more core aspects of the appeal.

In any case, ever since then the courts have continued to be skeptical of that type of argument.

A private company that alleged Google was exploiting its free online search service in an anti-competitive manner brought one of the earliest antitrust lawsuits against Google. The complaint was dismissed in 2007 by a court reasoning that antitrust law does not “concern itself with competition in the provision of free services.”

In 2008, the Federal Trade Commission allowed Google to acquire online advertising giant DoubleClick. Only one of the five commissioners voted to block the merger, pointing out that the acquisition would give Google access to a wealth of user data that could tip the market for search advertising (closely related to the market for free online search) further in favor of Google.

Four years later, the agency unanimously approved Facebook’s acquisition of free photo-sharing network Instagram, though many industry observers concluded that Facebook was paying a massive premium to stave off competition from its upstart rival.

And the next year, the agency voted (again unanimously) to close its investigation into Google’s conduct in the free online search market, despite a leaked staff report identifying harm to consumers caused by the search giant.

All in all, “free" products seem to warrant a free pass from U.S. antitrust laws. However, not so in other jurisdictions.

Russia’s Federal Antitrust Service in August issued a US$6.8 million fine against Google for abusing its market position with Android by favoring its own digital services over those of rivals.

Earlier this summer, the European Union issued its third statement of objection to Google, meaning Google could face up to three antitrust charges relating to its free search service, free smartphone operating system and its search-advertising platform. In addition, Germany’s antitrust regulator is currently investigating Facebook’s privacy practices.

‘Free’ markets are still markets

Why have international enforcement agencies responded so differently than those in the U.S.? Are they just unfairly targeting successful U.S. firms, as some (including Treasury Secretary Jacob Lew) claim? Or do they see something that we’ve missed?

U.S. antitrust law is uniquely devoted to a strain of economics often called “price theory.” Beginning in the 1970s, price theory came to dominate antitrust law and scholarship.

Price theory (no surprise) focuses on prices. Supposedly, price theory uses price as a synechdoche to represent all aspects of competition. However, in fact, businesses compete not just on price but also on quality, innovation, branding and other product attributes.

Yet U.S. antitrust regulators and courts have traditionally focused heavily on price competition. When products are “free” (or, more accurately, “zero-price”), they simply slip under the antitrust radar.

Such, I would argue, was the case in the broadcast radio industry, which has long offered a service “free” to listeners.

In 1996, Congress passed the Telecommunications Act, which removed a longstanding limit on how many stations a single entity can own. A frenzy of mergers and acquisitions followed.

U.S. antitrust enforcement agencies screened these transactions for possible harm to competition but only looked for higher prices to advertisers, neglecting to analyze potential harm to listeners. Most of the mergers were cleared without objection. The resulting lack of competition in many regions means that radio listeners now pay more – by listening to more ads – in exchange for the product they want.

That result should come as no surprise. Listeners may not pay for broadcast radio with money, but they do pay with attention. At its core, this is a prototypical market exchange, as contract law has long recognized.

There’s (still) no such thing as a free lunch

In fact, the very idea of for-profit businesses giving consumers products free ought to seem odd.

When it comes to the marketplace, as Milton Friedman famously quipped, “There is no free lunch.” The internet did not destroy firms’ profit motive. It also did not eliminate the cost of making products: Try recreating Google’s “Street View” feature without funding for a global fleet of cars, cameras and drivers, not to mention banks of servers for processing and data storage.

Companies like Google, though innovative, are not in the business of giving away their products free – and they are surely not immune from the temptation to stifle competition.

“Free” isn’t really free. Consumers pay for “free” products with attention to ads and with personal information. Each time you log on or run a search, you pay with your time (that fraction of a second your eye spends darting over to the “Lose belly fat with this one weird trick!” ad) or information (letting Google know that you are thinking about buying a new sofa or suffer from anxiety disorder). These are commercial exchanges, even if consumers – and consumer protection laws – often fail to recognize them as such.

Antitrust laws are meant to safeguard marketplace competition, but doing so effectively requires protecting all markets, not just those with obvious prices.

This is why I believe U.S. enforcement agencies and courts ought to follow the lead set by their international peers and withdraw the free pass enjoyed by businesses supplying “free” products.

Professor at Columbia University. Recipient of the Nobel Memorial Prize in Economic Sciences in 2001 & the John Bates Clark Medal in 1979. Author of "Freefall: America, Free Markets", "The Sinking of the World Economy", "Globalisation and its Discontents" & "Making Globalisation Work".

Chancellor of the Exchequer of the United Kingdom from 1992 to 2007. Prime Minister of the UK between 2007 and 2010. Inaugural 'Distinguished Leader in Residence' at New York University. Advisor at World Economic Forum